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Interest-only Mortgages

Monday, 22nd July, 2013

The FCA has confirmed to MPs that it will impose stricter controls on interest-only mortgages in future, but will not ban them - and does not believe there was widespread mis-selling in the past, although it concedes there may have been "some instances".


Chief executive Martin Wheatley, in a letter to the Treasury Select Committee chairman Andrew Tyrie, said: "We do not want to prevent consumers from getting an interest-only mortgage."


He added: "However, we do not want consumers to enter into interest-only mortgages to stretch the amount they can borrow, without being able to afford to repay the capital at the end of the term."


He also said: "We believe that interest-only mortgages have a place within the future mortgage market but that consumers should have a clearly understood and credible payment strategy in place to repay their loans at the end of the term. This is why our rules, which come into force in April 2014, will require lenders to undertake a robust underwriting assessment to confirm that interest-only customers have such a strategy in place."


The exchange of letters between Wheatley and Tyrie comes after the FCA warned that some 300,000 interest-only borrowers are not doing enough to ensure that they can repay the loan at the end of the term.


Wheatley's letter was in response to one from Tyrie asking if the FCA thought there was a place in the market for interest-only mortgages, and whether the concept of buyer beware applied to the issues facing borrowers with interest-only loans.


Tyrie also asked the FCA what it plans to do about the 2.5% of customers who did not realise at the point of sale that they had to have a repayment plan, and still do not have one.


Wheatley said that the regulator requires all lenders to send an annual statement to customers, including a prominent reminder of the need to repay their capital.


Wheatley said there was no evidence of widespread mis-selling: "Whilst it is impossible to rule out some instances of poor practice, we are not currently planning further work into historic sales practices. Instead we are focused on encouraging lenders and consumers to act now to mitigate the potential future consumer detriment."


He emphasised: "Our study does not suggest there has been large-scale poor practice in respect of these requirements. The vast majority of customers understood the product they were sold, understand the need to repay the mortgage balance, and have plans, albeit in some circumstances imperfect, on how to repay."


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